Continuing to work after age 65 can certainly help your retirement finances. You can continue to save for retirement, your existing savings will have more time to grow before you begin withdrawals and the number of retirement years you need to pay for will be shorter. But there are a few ways employment after age 65 can hurt your retirement finances. Take care to avoid these problems when working after age 65.
Signing up for Medicare. It's important to sign up for Medicare at the correct time, even if you are still working and don't need the coverage yet. You can first claim Medicare benefits during a seven-month period that begins three months before the month you turn 65. If you don't sign up during this initial enrollment period, your monthly Part B premiums may increase by 10 percent for each 12-month period you were eligible for Part B but didn't claim it.
However, if you are covered by a group health plan based on your or your spouse's current employment after age 65, you can avoid Medicare's late enrollment penalty if you sign up anytime you're still covered by the group health plan or within eight months of leaving the job or the coverage ending. "If you are currently working when you become entitled to Medicare, you don't have to sign up for Part B if you have group-sponsored coverage through your employer or if your spouse does," says Juliette Cubanski, a Medicare policy analyst at the Kaiser Family Foundation. "If you don't sign up for Part B when you are either first entitled or when you first don't have other coverage, you will be subject to a late enrollment penalty." COBRA coverage and retiree health plans are not considered coverage based on current employment for the purposes of avoiding the late enrollment penalty.
There's also a late enrollment penalty that is applied to Medicare Part D premiums if you don't sign up when you are first eligible or go 63 or more days in a row without prescription drug coverage. And a Medigap open enrollment period begins the month you're first enrolled in Part B, after which you could be denied the option to buy a Medigap policy or it could cost significantly more.
Impact on Social Security. Continuing to work after age 65 is typically good for your Social Security payments. Most baby boomers aren't eligible for unreduced Social Security payments until age 66, and for people born in 1960 or later, the full retirement age is 67. Payments further increase by 8 percent for each year you delay claiming up until age 70. "It can work in your favor to delay benefits in order to maximize the Social Security benefit that you will receive," says Jim Blankenship, a certified financial planner for Blankenship Financial Planning in New Berlin, Ill., and author of "A Social Security Owner's Manual." After age 70, there is no additional increase for waiting to claim your Social Security payments.
However, if you decide to sign up for Social Security benefits before your full retirement age while you are still working, part or all of your payments could be temporarily withheld. Social Security beneficiaries who are younger than their full retirement age will have $1 in benefits withheld for every $2 they earn above $15,720 in 2015. Retirees receiving Social Security payments who will turn 66 in 2015 can earn up to $41,880, after which one benefit dollar will be withheld for every $3 earned above the limit. However, once you turn full retirement age, you can earn any amount without having your benefit withheld, and Social Security payments are recalculated to give you credit for any withheld benefits.
Required minimum distributions. Withdrawals from individual retirement accounts typically become required after age 70½, and income tax will be due on withdrawals from traditional retirement accounts. However, if you are still working and don't own 5 percent or more of the company you work for, you can continue to delay withdrawals from the 401(k) associated with your current employment until April 1 of the year after you retire, if the plan allows it. "When you turn 70½, if you are still working for an employer, you have a 401(k) and assuming that you don't own 5 percent or more of the company, you can still delay taking money out of the 401(k)," says Howard Hook, an accountant and certified financial planner for EKS Associates in Princeton, N.J. However, withdrawals from IRAs and 401(k)s from previous employers will still be required, and there's a steep 50 percent tax penalty if you fail to withdraw the correct amount. Additionally, retirement savers age 70½ and older are no longer eligible for a tax deduction if they make traditional IRA contributions.